Parent Co. owns 75% of Sub Co. and uses the cost method to account for its investment. The following are summarized income statements for the year ended
December 31, Year 7. (Sub Co. did not declare or pay dividends in Year 7.)
On July 1, Year 7, Parent purchased 40% of the outstanding bonds of Sub for $152,500. On that date, Sub had $400,000 of 10% bonds payable outstanding, which mature in five years. The bond discount on the books of Sub on July 1, Year 7, amounted to $20,000. Interest is payable January 1 and July 1. Any gains (losses) are to be allocated to each company. Both companies use the straight-line method to account for bonds.
Prepare a consolidated income statement for Year 7 using a 40% tax rate.